The allegations against Centerra Gold Inc. could not be any more outrageous: International fraud. Environmental destruction. Stealing gold bars and hundreds of millions of dollars and running away.

That is a small sampling of what the Toronto-based miner is facing in Kyrgyzstan, where a political debacle began last week and continues to get worse.

On Wednesday, the Kyrgyz parliament passed a resolution to revise the operating licence on Centerra’s flagship Kumtor gold mine. Among other things, the resolution calls for changes to the tax regime and concession area at Kumtor, while boosting the government’s stake in Centerra (though a call for outright nationalization was voted down).

This comes just days after the release of an incendiary 800-page parliamentary report that accuses the mine of environmental damage on a mass scale. Centerra considers all of the accusations to be total nonsense, but its shares have dropped roughly 25% since the report was made public last week.

“There have certainly been a lot of outrageous allegations. You just can’t make this stuff up,” said John Pearson, vice-president of investor relations at Toronto-based Centerra.

While Wednesday’s resolution is non-binding, it throws another black cloud over Centerra’s operations in the former Soviet state, where its title has been questioned many times in the past.

Jonathon Rivait/National Post

The frustrating part for Centerra shareholders is that they thought all these questions were sorted out three years ago, when the company signed an agreement with the government that established tax terms for Kumtor and gave Kyrgyzstan a 33% stake in Centerra.

This latest flare-up demonstrates some politicians think the state got a bad deal and should demand more. The key individual behind the 800-page report is Sadyr Zhaparov, the leader of the parliament’s sole opposition party. He recently claimed that the 2009 deal endangers Kyrgyzstan’s “national security,” and the report may be part of his effort to embarrass the government.

Centerra believes the resolution passed Wednesday is non-binding and can be ignored by the government if it chooses. On the other hand, the 2009 agreement was written into law.

“Obviously we’re talking to all levels of agencies and government officials to get this thing sorted out,” Mr. Pearson said.

But the fact these allegations even exist is an indication that Centerra can never be completely secure about its title in Kazakhstan, even though Kumtor has run without interruption for 15 years.

Part of the problem is that the sheer size of the mine puts it in the national spotlight: Kumtor makes up 12% of the country’s gross domestic product and more than half of its national exports. Centerra is the largest foreign investor in the country by far, which makes it an easy target for angry politicians.

The other issue is political stability, which is always a concern in Central Asia. Kyrgyzstan had a political revolution just two years ago.

The irony is that the parliament’s anti-Kumtor statements are costing the government money. The value of its Centerra shares has plummeted by more than $230-million in the last week.

Centerra Gold Inc. is under pressure in Kyrgyzstan yet again, and the allegations against the company are stunning: environmental destruction, endangerment of national security and more.

The claims originated in a mammoth 800-page report on Centerra’s Kumtor mine that was prepared by a parliamentary commission. The head of the commission, an opposition deputy named Sadyr Zhaporov, believes the government’s operating deal with Centerra is improper and should be tossed out.

‘We believe this is something we’ve weathered in the past and will weather again.’

The report was released earlier this week, and the government debated on Friday whether to revoke Centerra’s license. The stock plummeted more than 25% as a giant black cloud was cast over the company.

Centerra is studying the report and said the claims of environmental damage are nonsense. The Toronto-based miner is confident it can withstand this latest political storm in Kyrgyzstan, as it has in many other instances.

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“We believe this is something we’ve weathered in the past and will weather again. It’s one of the things we seem to be able to do,” chief financial officer Jeffrey Parr said in an interview.

The commission was formed a few months ago with a mandate to look at some environmental and safety issues around Kumtor. It appeared to be nothing unusual until the shocking report went public this week. The government is expected to resume discussion of it on Wednesday.

Given that the report was led by a prominent opposition member it might have been an attempt to embarrass the government.

Kumtor has operated without any major interruption since 1997 but political turmoil has been a frequent problem for Centerra in Kyrgyzstan. The company has dealt with multiple nationalization concerns, a taxation evasion probe, an international arbitration case, and even a 2010 political revolution.

Centerra thought most of its problems were resolved a few years ago, when it reached an agreement that established tax terms for Kumtor and gave the Kyrgyz government a 33% stake in Centerra. But this latest blow-up shows Kumtor remains a contentious topic in the Central Asian country.

Mr. Parr said that Kumtor draws a lot of attention because it is such a huge part of the Kyrgyz business environment. The mine makes up roughly 12% of the country’s gross domestic product and more than half of its national exports.

Experts consider a nationalization or other serious action against Kumtor to be unlikely. BMO Capital Markets analyst Andrew Breichmanas noted that it is a technically challenging mine that needs “significant operational expertise and capital investments” to stay profitable.

Another issue is that Kyrgyzstan’s fate is tied up with Centerra because of its share ownership. The collapse in Centerra shares on Friday wiped more than $250-million of the government’s investment. “I would expect some press coming out of [Kyrgyzstan] tomorrow about what the value of their shareholdings has gone to,” Mr. Parr said.

FP:Doing business in Kyrgyzstan looks pretty risky from the outside. How about from the inside?SL: Centerra or Cameco Gold, its predecessor, have been in Kyrgyzstan for almost 20 years, and there have been times when publicly it seems like there’s a lot of political risk and there are other times when it seems we have no political risk. The reality is always in between the two. There are some challenges, they’re probably not as chaotic or as desperate as it might seem from the outside, but it’s probably never a stress-free part of the world.

FP: How did Centerra handle the 2010 revolution?
SL: That was the second revolution since the mine opened and we just kept operating. The GDP in the Kyrgyz Republic is about US$5 billion and the Kumtor gold mine represents some 20-25% of that, so it’s an important part of the economy regardless of who is in power. The other unique factor is that the Kyrgyz government through Kyrgyzaltyn JSC, the state-owned mining company, is the largest shareholder in Centerra. Whoever is in power, there is a relationship there with Centerra.

FP:Any nationalism calls?
SL: There was some in 2007, 2008, but that’s really the extent of it. There was a presidential election last year and at one point there were 80 candidates, which I think was narrowed down to 30. Two of the candidates were calling for the nationalization of Kumtor, but they combined for just over 1% of the vote. You’re in a pretty active democracy there and there are going to be a lot of different voices. One thing that is important for us is to not respond to each, but know when an issue is important and when is it being raised or pushed by people of influence.

FP:How do you go about assessing the risk factors?
SL: You try to be proactive. We have a group in Bishkek meet with the new government and elected officials as soon as they’re in office. They go through the history of Kumtor, the economic investment we’ve made and continue to make, what our payroll is in-country, what our local purchases are, so they understand what we’re doing and how we’re supporting the economy. Sometimes it’s a matter of standing up for your legal rights in the country as well.

FP:How do you do that without seeming confrontational?
SL: If a debate is up on a matter of taxes, for example, that we think is inappropriate given the stability agreement, we would make sure the prime minister, the finance minister and anyone else who is involved are aware of what the agreements are and what our position is before it gets really escalated into a very public arena where somebody might take a position and later be embarrassed or surprised by our reaction.

FP:Centerra seems to take corporate social responsibility seriously.
SL: It’s really been growing organically. Where it has come up even more is during the last 2.5 years to three years with the run-up of gold prices. The company is a lot stronger financially and in a position to do more than we had before. The GDP per capita in the Kyrgyz Republic is US$800. It’s one of the poorest countries of the former Soviet Union. There is a responsibility beyond just simply operating, hiring people and paying our taxes.

FP:How has that effort evolved?
SL: We started doing this at the local level. We established a small micro-credit in the communities near the mine, we helped support a fruit processing plant not far from the mine and a number of other enterprises like that. In late 2010 we started funding a maternity hospital in Barskoon at a cost of about $7 million and last year we funded the repair and construction of schools and medical facilities at a cost of about $10 million.

TORONTO • The biggest frustration for gold investors in recent years is that the equities have drastically underperformed the gold price. Chuck Jeannes believes the companies themselves should shoulder some of the blame.

“There have been a series of bad news events for some of the peer group that have scared investors in our space,” the chief executive of Goldcorp Inc. said in an interview Tuesday. “As one generalist investor put it to me recently, he’s afraid to invest in our space for fear of opening his screen in the morning and seeing one of his positions down by 20%.”

His comments were prescient, as that exact scenario played out yet again on Tuesday.

Shares of Centerra Gold Inc. plunged 15% after the company slashed 2012 production guidance at its Kumtor mine in Kyrgyzstan by as much as 38%. The Toronto-based company is dealing with increased ice movement in part of the Kumtor pit, which is delaying access to high-grade ore. As a result, Centerra is now guiding for 390,000 to 410,000 ounces of gold production this year, down from the prior level of between 575,000 and 625,000 ounces. Analysts expect Centerra’s operating costs to rise as well.

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Centerra is just one in a growing group of gold miners that have stunned investors with bad news recently. It includes Kinross Gold Corp. (project delays and impairment charge), Agnico-Eagle Mines Ltd. (one mine written off completely, another partially), and Randgold Resources Ltd. (a military coup in Mali has raised uncertainty).

In addition to operating and political problems, Mr. Jeannes blamed the poor performance of gold stocks on two other factors: cost inflation, and the fact that investors are not comfortable with current gold prices (about US$1,700 an ounce) and are using lower prices in their models.

He added that a key theme for gold miners right now is “capital intensity” — in other words, how much capital companies are spending for each ounce of new production. He said there is a sense that some miners are chasing every gold ounce in the ground right now, rather than developing projects that make good financial sense.

“I think you’re going to see the market continue to discern more and more between the high-quality projects that should be built, and those that are just growth for growth’s sake,” he said. “Leaving ounces in the ground can be the best thing to do if the cost of producing them doesn’t provide a return to shareholders.”

Agnico-Eagle provided an example just this week, as it reduced the gold reserves at its Meadowbank mine in Nunavut by 37%. Operating costs at the remote mine have run above expectations, and Agnico is shrinking the project in order to optimize it and lower costs.

Mr. Jeannes thinks the total gold reserves that companies report are “overrated,” as the real focus should be on the ounces that are likely to come out of the ground.

“The thing I’m most proud of with our reserve statement is that every one of those ounces is either at a mine that’s in production or at a project that’s being constructed,” he said.

Gold equity underperformance has been a running narrative for the past year or so as the rising price of physical gold has far outstripped that of gold explorers and producers.

Now, in a bid to draw investors and their capital back into the gold equity market, high-end producers have introduced gold-linked dividends that pay out based on a combination of gold price and gold production.

It’s a game-changer for the industry and a trend that is expected to accelerate, Steven Green, analyst with TD Securities, said in a report.

“We attribute the increasing focus on dividends largely to the success of the gold ETFs which have outperformed most gold equities over the past couple of years,” he said. “By increasing the return of capital to shareholders, companies are aiming to offer a more compelling investment case to investors relative to the gold ETFs.”

Dividend payments are up 75% overall year-over-year, compared with a 26% increase in 2010. The 2012 forecast shows another 26% increase on top of the gains of 2011, largely due to the full annualized impact of dividend increases this year as well as Newmont Mining and Eldorado Gold’s projected dividends at US$1,700 an ounce.

“Newmont’s new gold-linked dividend policy has set a new high watermark for gold equity dividends,” Mr. Green said.

Its shares are yielding 2%, outperforming the 0.5% to 1% average for its peers and comparable with the yield on the S&P 500.

If gold hits US$2,000/oz, which does not seem as much of a stretch as it did in the past, Newmont’s shares would yield a strong 3.9%. Eldorado, meanwhile, is yielding 1%.

A linked dividend policy benefits both investors and management. Investors get a better idea of how their dividends will change, companies can be more aggressive with their rates without the concern of whether they can maintain them in the long run if gold prices fall, and finally it instills some capital discipline with management.

“We would not be surprised to see other producers adopt similar structures (this week South African gold producer Harmony Gold Mining announced that it would consider a gold-linked dividend),” he said.

Hecla Mining, as well, has adopted the same model for silver, launching a linked dividend in September.

The most likely companies to increase their dividends in the next six to 12 months are Goldcorp, Yamana Gold, Iamgold, Silver Wheaton, Centerra and Alamos Gold.

Franco-Nevada, a mining royalty company, can also afford to pay out a higher rate than it currently does and is expected to do so within the next six to 12 months as well.

The firm historically pays out between 20% and 25% of its cash flow as dividends, but is paying out at about 18% of 2012 cash flows at the moment. It can afford higher rates as the company does not need to reinvest capital into new mining operations.

LONDON – The award of a much-delayed mining permit that will turn European Goldfields into Europe’s largest primary gold producer could also make it a prime takeover target, in a sector where players are scrambling for growth.

The permit to develop the Olympias and Skouries projects in north-eastern Greece was first submitted five years ago and the company hopes output from these, along with its Certej project in Romania, will transform it into a mid-tier miner with production of about 400,000 ounces of gold a year by 2014.

The projects and an attractive growth pipeline, delayed for so long by red tape and environmental concerns, should bring suitors, some of whom have already been circling, despite concerns about investing in Greece and mining in Europe.

Canadian group Eldorado Gold Corp is one of the natural predators as it already has two operating mines in Turkey, where European Goldfields also has exploration targets, and a development project in Greece.

“It got to board room level previously,” an industry insider said.

“It just got rejected by their board at the last minute because they hadn’t had the permits… Eldorado is the right size and European Goldfields would be a meaningful acquisition for them.”

Eldorado was not available for comment.

Other Canadian gold miners, such as Barrick Gold and Newmont Mining, or Russia’s Polyus Gold and Polymetal may also take a look, although none of them has operations in Greece, Romania or Turkey. While Canada’s Centerra Gold, which has exploration properties in Turkey, may also be interested.

“No-one was going to touch them until they had it, given the history of the permit,” said a mining banker, adding the list of suitors will be limited, however, given European Goldfields’ focus on Europe, specifically Greece, away from more traditional growth areas within Africa.

But many mid-size and larger gold producers are struggling to maintain production profiles, or to offset declines after years of growth, at a time when gold prices are near record highs.

Barrick’s surprise acquisition of copper miner Equinox Minerals in April for $7.3-billion was seen by many as an attempt to add value by diversification due to a scarcity of attractive gold targets.

For the world’s largest gold producer Barrick, which produces around 8 million ounces of gold a year, any takeover target would need annual output of at least 400,000 to 500,000 ounces — with room to grow.

The Skouries project, which European Goldfields hopes will produce about 350,000 gold equivalent ounces a year, is a gold-copper porphyry deposit.

“The copper angle may deter some people, but it also may be of interest to others,” said an industry banker. “Someone like KGHM could look at it…but I think valuations could be an issue for them.”

Financing the acquisition is unlikely to be an issue as most M&A deals in the gold sector are typically paper transactions, although there could be a cash element.

Getting the permit was seen as the biggest risk for European Goldfields. Construction is also not seen as a major issue especially as the company’s biggest shareholder Aktor SA is a wholly owned subsidiary of Ellaktor, Greece’s largest construction group, with a 19.3% stake.

“I don’t think they (Aktor) want to be in the mining business…they would sell at the right price,” said Andy Davidson, an analyst at Numis Corp.

Shares in European Goldfields jumped 33% last week, but are little changed from the start of the year as gold stocks continue to underperform.

Davidson said any offer was likely to come in above 13 pounds a share, valuing the company at more than 2.4 billion pounds (US$3.9-billion).

The shares traded at 821.5 pence at 1241 GMT on Tuesday.

Importantly, analysts and industry insiders said, the board of European Goldfields — including chairman Martyn Konig who joined the company when the shares were trading below 4 pounds — are thought to be keen to sell.

The company has 10 million ounces of gold reserves and is expected to give a number of corporate updates soon.

Paul Burchell, analyst at Dundee Securities, said resource and reserve estimates on Olympias and Skouries are due to be revised using a long-term gold price assumption of US$1,000 an ounce from US$650 and US$450 respectively.

Konig told Reuters last week that the company also hopes to have positive news in the next quarter on its Certej permit.

Centerra Gold Inc.’s reserve update is getting a positive response as the stock moved up more than 7% in Toronto trading at midday.

The miner’s total proven and probable gold reserves climbed 843,000 ounces to 8.2 million after 2010 production is taken into account.

At Centerra’s Kumtor mine in the Kyrgyz Republic, reserves are up from to 6.3 million ounces from 5.5 million. That includes the conversion of 265,000 ounces of open pit resources and 773,000 ounces of high grade underground resources into open pit reserves.

Kumtor’s life-of-mine plan now includes an open pit expansion, which is expected to increase production by 500,000 ounces of gold, or 20%, over the next five years. This raises Kumtor’s average forecast production to 620,000 ounces annually for the next five years, noted UBS analyst Brian MacArthur.

He revised his earnings per share estimate for 2012 to $1.98 from $1.20 to reflect updated production, costs, capex and expenditure guidance.

As a result, the analyst upgraded Centerra to Buy from Neutral and raised his price target to $23 from $22.50. However, he noted that the company continues to have above average political risk.

Things are looking up for Centerra Gold Inc., after the company posted better-than-expected second quarter results last week while the political situation in Kyrgyzstan appears to be stabilizing, a note from Canaccord Genuity said.

In a note to clients, Steven Butler with Canaccord raised his price target for the Toronto-based gold producer to $15.75 from $13.25 while maintaining a Hold rating.

The raise in target price, along with earnings at 13¢ a share ahead of estimates of 6¢ a share (consensus 5¢ a share), reflect increased confidence in Centerra’s important Kumtor gold mine in Kyrgyzstan.

“After the unfortunate civil unrest and riots in Bishkek which led to the resignation of the former president, Kurmanbek Bakiyev, and the appointment of a provisional/interim government, the situation in the Kyrgyz Republic appears to have somewhat stabilized,” Mr. Butler said in the note.

As a result, he has lowered his discount rate on the Kumtor mine to 7.5% from 10%. A further lowering of the discount rate to 5% could add as much as US62¢ a share in value to Centerra’s estimated net asset value, he said.

However, there is potential for a weak third quarter at Kumtor, and costs at Centerra’s Boroo mine in Mongolia may rise as well, Mr. Butler said.

There is also risk of potential instability during upcoming parliamentary elections in October in Kyrgyzstan, he said.